Your boss has just presented you with the summary in the accompanying table of p

Question

Your boss has just presented you with the summary in the accompanying table of projected costs and annual receipts for a new product line. He asks you to calculate the IRR for this investment opportunity. What would you present to your boss, and how would you explain the results of your analysis? (It is widely known that the boss likes to see graphs of PW versus interest rate for this type of problem.) The company's MARR is 9% per year. End of Year Net Cash Flow - $470,000 42,600 90,000 +399,000 + 621,500 - $221,300 2 4 5 The IRR is-%. (Round to one decimal place.)

Explanation / Answer

Year Project Cash Flows (i) DF@ 12% (ii) PV of Project A ( (i) * (ii) ) DF@ 20% (ii) PV of Project A ( (i) * (ii) ) 0 -470000 1                 (470,000.00) 1 (470,000.00) 1 -42600 0.893                    (38,035.71) 0.833     (35,500.00) 2 90000 0.797                     71,747.45 0.694      62,500.00 3 399000 0.712                   284,000.32 0.579    230,902.78 4 621500 0.636                   394,974.49 0.482    299,720.29 5 -221300 0.567                 (125,571.56) 0.402     (88,935.51) CASH INFLOW                   117,114.98 NPV       (1,312.44) IRR = Ra + NPVa / (NPVa - NPVb) * (Rb - Ra) 12% + 117114.98 /(117114.98+1312.44)*8% 19.90%

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